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Philanthropy Journal – Critics’ Blue notes off key

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By Todd Cohen

State regulators and consumer advocates need to tone down the alarms they are sounding over plans by Blue Cross to become a business – and think harder about the impact the conversion would have on Blue Cross, the charitable foundation its conversion would create and the North Carolinians both groups would serve.

And Blue Cross needs to do a better job of selling North Carolinians, and its own trade group, on its plan.

In the end, the conversion will work only if the new foundation is given the tools it needs to be an effective philanthropy and a responsible steward of its assets.

The critical question involves the degree to which being a responsible steward requires a foundation to be a big player in the business decisions of the companies in which it owns stock.

The stakes, already high, have escalated – and the alarms have grown shrill – in the face of new estimates that the Blue Cross stock the foundation initially would get, representing the insurer’s fair market value, would be worth $2 billion to $3.5 billion.

To untangle the mess and find a compromise, Blue Cross, regulators and consumer advocates all need to think about the respective dilemmas each faces.

When Blue Cross and Blue Shield of North Carolina first hinted in 1997 it might become a for-profit business, nonprofit leaders in the state moved quickly and effectively to try to help shape the creation of what promised to be one of the state’s biggest philanthropies.

With the help of lobbying by those leaders and the Coalition for the Public Trust they formed, state lawmakers passed a law in 1998 that mapped the steps Blue Cross and regulators would have to take if the insurer tried to become a commercial enterprise.

The law also set rules for a new foundation — to be created through the conversion and initially own all Blue Cross’ stock — that would have the job of addressing citizens’ health needs.

That law gave groups representing nonprofits, hospitals, physicians, businesses and higher education a role in screening candidates for the foundation’s 11-member board — which Attorney General Roy Cooper expects to name soon.

The law also gives the state Department of Insurance and Department of Justice the job of deciding whether to approve Blue Cross’ conversion plan.

Insurance Commissioner Jim Long – who in October will hold three public hearings on the conversion plan – must decide whether the Blue Cross plan is fair, equitable and in the public interest.

Whatever he decides, Long can count on being held accountable for what happens to the rates Blue Cross charges and the services it provides to its policyholders. 

With health-care costs soaring and Blue Cross saying it needs for-profit status to more effectively wheel and deal in the cut-throat health-care jungle, Long must decide whether Blue Cross can offer more competitive rates and services as a nonprofit or a for-profit entity.

And in weighing the relative impact on the public interest of a nonprofit compared to a for-profit Blue Cross, Long must factor in the potential public benefit of the new foundation – in both its philanthropic and shareholder roles.

What’s more, he must estimate the value of the assets he expects the foundation to get from the sale of Blue Cross stock, particularly when stock is sold to the public for the first time in an “initial public offering,” or IPO.

Until stock is sold for the first time, the foundation would have no cash with which to make grants.

The stock’s value will depend on what buyers are willing to pay – which will depend on buyers’ judgment about Blue Cross and its management.

That judgment will be colored by the role the foundation is given in the insurer’s critical business decisions.

Buyers will want to know what exactly they are buying, and who will be in charge — Blue Cross’ management and board, or the foundation.

Defining the foundation’s role also has created a dilemma for consumer advocates.

In addition to trying to ensure that the foundation gets the best value possible for the Blue Cross stock it will own, consumer advocates want the foundation to get a strong hand in Blue Cross’ big corporate decisions and serve as a corporate watchdog.

These consumer advocates want the foundation to have enough clout to protect the value of its Blue Cross stock.

They also want the foundation to help inoculate Blue Cross against the financial and accounting abuses that have ravaged corporate America – hurting shareholders, employees and consumers alike.

But by pushing to strengthen the foundation’s hand in Blue Cross’ big decisions, consumer advocates risk infecting the foundation with the very bug they want the foundation to keep Blue Cross from catching.

They want the foundation to have a greater voice and more information – insider information – than shareholders typically have a right to get.

If regulators and watchdogs have their way, for example, the foundation would know before other shareholders and potential investors about major moves Blue Cross was planning, such as the sale of assets or the acquisition of another company.

If, possessing insider information, it sold some Blue Cross stock, the foundation could make a killing at the expense of buyers and other shareholders.

That might seem like a far-fetched possibility, yet is precisely such extreme scenarios – with Blue Cross playing the role of the heavy — that consumer advocates offer in arguing that the foundation should be given a strong watchdog role to prevent abuses by Blue Cross.

Because the foundation will be a philanthropic entity, consumer advocates seem to believe, it will be capable of doing no wrong and should have extraordinary shareholder powers and an intimate role in the business of running Blue Cross.

Those advocates seem to believe the foundation is entitled to be the ultimate insider – a shareholding superhero whose good motives we all simply need to take on faith.

The fact is, however, that what constitutes good motives and good deeds is a matter of deeply divided opinion – and boards, however structured or empowered, are only as good as their individual members, and their ability to work together.

What’s more, while foundations should be good stewards of the assets they control, their main job is to hand out charitable funds – and not to walk a beat, carry a heavy nightstick and look for corporate evildoers.

And even if, as consumer advocates urge, the foundation is supposed to be a corporate watchdog, on what basis should Attorney General Cooper select members of the foundation’s board? Should he screen candidates for their knowledge of philanthropy and health-care issues, or for their ability to run a big health-insurance company?

Whether they like it or not, because the foundation initially will own all Blue Cross’ stock, the two organiza
tions will be joined at the hip – forced by necessity to work closely with one another on big decisions involving corporate strategy.

Driving the escalating furor is Blue Cross, which wants to be a commercial enterprise but finds itself caught in a tug of war between regulators and consumer advocates on one hand, and the trade group that controls the valuable “Blue Cross” and “Blue Shield” names and marks on the other.

A panel of the Blue Cross and Blue Shield Association, the trade group, now has voted not to approve Blue Cross’ conversion plan because it would give the foundation too much power in its business – even though, according to regulators, the association’s rules give it room to give the foundation more power.

Blue Cross, which says it would give the new foundation unprecedented power in its business compared to foundations created through Blue Cross conversions in other states, has signaled its willingness to compromise.

But Blue Cross needs to do a lot more to make its case — to regulators, to its trade group, to consumer advocates and to the public. It needs to persuade us in clear and simple terms everyone can understand:

* Why it needs to become a for-profit business rather than remain a nonprofit.

*How the conversion will benefit both its members and taxpayers, and affect rates and health care in the state.

* What the downside of the conversion could be for its members, for taxpayers, for rates and for health care in the state.

* What the foundation’s role will be in the insurer’s business decisions, and why.

* What measures are or will be in place to prevent corporate abuses.

While Blue Cross may have strong arguments addressing each of those issues, and while it will be asked to make its case during the October hearings, it needs to do a lot more, immediately, to educate North Carolinians about its position – rather than simply reacting to moves by regulators, consumer advocates, the Blue Cross and Blue Shield Association and the news media.

Surprisingly mute in the growing debate has been Blue Cross’ board. Members of that board – business, professional, education and civic leaders from throughout the state – need to get on the stump and start explaining what their intentions are, and telling North Carolinians why we should care about the conversion and why it would be in our best interests.

These are important and tough issues. Ultimately, the decision that state regulators make will be political – based on compromises that reflect, in theory at least, what is best for policyholders and taxpayers who also happen to be voters.

The key challenge for all involved, in addition to engaging in a debate that remains civil and ensures all voices are heard, is to keep both Blue Cross and the new foundation from becoming part of the serious problems facing corporate America — and instead make sure the two organizations becomes part of the solution to the crushing health-care needs in our state.

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